June Market Commentary

Some months we sit down to write this report and think to ourselves, ‘Not much happened really…’ And then you get a month like the one that’s just finished where pretty much everything happened!

Elections were held across Europe – and the big story was the rise and rise of the extremist parties, with UKIP topping the poll in the UK and the Front National doing equally well in France. This was emphatically not business as usual, and recent opinion polls suggest that the vast majority of UKIP’s supporters will remain loyal to the party in the 2015 General Election – making the outcome very difficult to predict. At the moment Labour and Ed Miliband are the marginal favourites, but with UKIP determined to target the Labour heartlands there are going to be a lot of safe seats looking a lot less safe on the night of 7th May 2015.

As the dust settled in Brussels it looked likely that Jean-Claude Juncker, former Prime Minister of Luxembourg would become the President of the European Commission. This led to speculation in Der Spiegel that Britain could move towards an in/out referendum much more quickly, with David Cameron apparently feeling that Europe needed a shake-up and Juncker was emphatically not the man to provide it.

UK

Away from the polling booths both the CBI and the British Chambers of Commerce (BCC) were in a bullish mood, declaring that the UK economy was “in good shape”.

The CBI said that growth reached a record high in May – even though it only started recording data in 2003 that’s an encouraging comment. Meanwhile the BCC upgraded its growth forecast for the year from 2.8% to 3.1% which – if achieved – would be the highest rate since pre-crisis 2007 and which is well above the 2.7% forecast by the Office for National Statistics.

The CBI picked out retail sales and professional and consumer services as sectors which were doing particularly well, whilst manufacturing continued to grow at “a solid pace”.

One sector that was growing at rather more than a ‘solid pace’ was the UK housing market, with figures from the Land Registry showing that prices had risen at their fastest rate for four years. Prices in April were 6.7% higher than a year ago, with the average house now costing £172,069. As usual this figure masked significant regional variations, with prices in London rising at 17% in the year – whilst the North East recorded a rather more modest gain of 2.9%. The Nationwide Building Society warned that prices in London would soon face a ‘natural correction’ and said that buyers were now becoming wary of ever-increasing prices.

The FTSE-100 index advanced rather more cautiously than the housing market, finishing May at 6,845 for a modest rise of 1% in the month: so far this year it has managed to add only 96 points to the 6,749 level at which it closed 2013.

Europe

As reported above, the elections for the European parliament produced a minor earthquake – however the proposed election of Jean-Claude Juncker suggests that Europe’s leaders think little has changed.

Certainly little changed for the German stock market, which once again had a good month, advancing by 4% to close May at 9,943. Looking back to earlier editions of this bulletin the DAX index ended May 2012 at 6,264 and is therefore up by very nearly 60% over the past two years (roughly double the increase in the UK index).

Consumer spending and the mild winter helped the German economy to expand by a seasonally-adjusted 0.8% in the first quarter of 2014. Unemployment remained steady at 5.2% and inflation was also steady at 1.3% – however, the trade surplus disappointed commentators slightly. Figures for March showed a surplus of €16.4bn which was down on the €18.9bn of the previous year: increases in imports (especially from Asia) were held responsible.

There was bad news for France, where figures released for the first quarter showed that the economy was stagnating. The trade deficit increased to €4.94bn in March, up from €3.77 in February, thanks to a surge in imports of energy and pharmaceuticals. Inflation edged up slightly as well, so there was a compelling economic background to the success of Marine le Pen’s Front National in the European elections. The French stock market was in an understandably cautious mood, rising by only 1% in May to end the month at 4,520.

We reported last month on the contraction in the US economy in the first quarter of the year, and there was more bad news last month, as personal spending fell in April and consumer sentiment followed suit in May.

Against this, sales of new homes surged in April – up to 433,000 from the 407,000 recorded in March – and the Purchase Managers’ Index for the manufacturing sector was up to 56.2 in May from 55.4 in April. Manufacturing also saw the best month-on-month increase in production since February 2011, so there were plenty of encouraging signs for the US economy: it was just that the consumers didn’t seem to be paying any attention to them.

The Dow Jones index ended the month up 1% on the month at 16,717 – like the FTSE in the UK it is also up 1% on a year-to-date basis.

Far East

The Chinese economic juggernaut rolled on – and it now has a new source of energy as Russia and China signing a 30 year, $400bn deal for Gazprom to deliver Russian gas to China in a deal which underlines Russia’s shift towards Asia and away from the West. The deal may also mean higher prices for European gas consumers, who are becoming increasingly dependent on Russian gas and now face competition for supplies.

Even without the new supply of gas, China’s factory activity in May grew at its fastest pace this year as the economy started to respond to the Bank of China’s recent stimulus package. The Purchasing Managers’ Index was also moving in the right direction – May’s figure of 50.8 being slightly up on the 50.4 recorded in April.

The stimulus package has also been extended to agriculture, with the Bank of China cutting the reserve requirement ratio for rural banks by 2%. Overall it was confirmed that the Chinese economy had expanded by 1.4% in the first quarter of the year.

The news was not so good on the other side of the Sea of Japan where inflation surged 3.4% to a 23 year high as Japan increased its sales tax from 5% to 8%. However it was confirmed that growth had picked up sharply in the first quarter and figures released for April showed a narrowing in the trade deficit, as the Bank of Japan kept monetary policy unchanged.

‘Unchanged’ was also largely the word for the region’s stock markets. The South Korean index barely moved at 1,967 while the Chinese market inched up 13 points to 2,039. Japan was up 2% to 14,632 and it was left to Hong Kong to turn in the best performance, with a 4% rise to finish May at 23,081.

Emerging Markets

Back on the election trail and India – the world’s largest democracy – finally declared a result in its General Election with victory going to the Hindu nationalist, Narendra Modi. The win was on a scale not seen since the 1980s and recriminations have already started in the previously-in-power Congress party.

Meanwhile growth in the Indian economy was disappointing, largely due to a slowdown in the manufacturing sector. The economy grew at an annual rate of 4.6% in the first quarter, which was below analysts’ expectations. However the Indian stock market was in a buoyant mood and rose 8% in May to finish at 24,217.

As we’ve already seen, Russia signed what Vladimir Putin described as ‘the world’s biggest gas deal’ with China, and saw its economy advance 0.9% in the first quarter. Unemployment fell to 5.3% and the trade gap widened. With no more sanctions being imposed following the annexation of the Crimea, the Russian stock market rose 10% in May to 1,432.

Not such a happy story in Brazil with the market there falling 1% to 51,239 as the economy barely grew at all. Unemployment fell slightly (as you would expect with the World Cup about to start) but inflation rose to 6.3%.

And finally…

Yes, the World Cup is now under way and as the England team flew out to Florida to begin their World Cup warm up there were apparently 606 pieces of baggage checked on to the plane. “Let’s hope when they come back from Brazil there’s 607,” chirped ITV’s sports news correspondent. Hmm…

But whichever team walks through customs with a gold trophy to declare, there already appears to be one certain winner from the World Cup. The world’s economies may have problems and consumers may (supposedly) be short of confidence but the bookmakers are expecting a bumper tournament, with turnover confidently expected to double from 2010. Irish bookmaker Paddy Power predicts its customers will bet €160m on the World Cup. However in the true spirit of the financial services industry we feel we should issue a wealth warning:

Football teams can lose as well as win. You do not always get the result you want and you may leave the sofa severely disappointed…

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